The payment schedule for your home extension project will form part of the contract of work and it’s necessary to provide dedicated commentary to this important topic to help avoid dispute and ensure the building work flows smoothly.
Why it’s important to agree a fair payment schedule
A common source of friction on contracts between homeowner and builder is the timetable to which stage payments are made. Agreeing a fair payment schedule with your builder before work starts is therefore essential for you both in making the construction phase a success. Your builder may set their expectations when they quote, but this a negotiable area.
There is often an innate tension between homeowner and builder when it comes to payments. Homeowners generally prefer to pay in arrears for work completed, whereas builders like to be paid ahead of time so as not to find themselves out of pocket. However, construction is a service-based industry, and this fact should bear out on the payment schedule, albeit in a manner fair to the builder too.
Builder payment schedules are a polemic issue and, depending on the nature of the project, the scheduling options can be numerous. It’s therefore not conducive to offer up a one-size-fits-all template as absolute. It’s perhaps more sensible to table a suggested schedule for a popular extension type, as a basis for discussion between homeowner and builder, and allow both to arrive at a mutually acceptable arrangement. Homeowners might like to consider using a standard domestic building contract from the likes of JCT or RIBA, which set out useful stage payment templates to work within.
Consider this example of payment schedule for a loft conversion:
|2||Completion of opening up works||10|
|3||Completion of steel installation||20|
|4||Completion of timber framing + roofing||20|
|5||Completion of first fix||20|
|6||Completion of second fix||15|
|7||Completion of snagging||12|
This payment schedule pertains to a loft-type extension. Although different project types have distinctive milestones, the base logic and structure should be similar across the range of extension types. Let’s look under the bonnet.
The deposit payment
The deposit should be paid upon agreement to proceed – typically, upon signing the works contract. This gives security to both parties that the job will start on the agreed date and allow both to prepare for the start as necessary. In our example above, the deposit is set at a nominal 1%. Builders would no doubt like a higher figure, but by this stage a homeowner is already invested to proceed, and a contract will already be signed to provide further surety. The 1% is there to serve as a psychological lock-in to both homeowner and builder that the job is going ahead.
The first real-stage payment
In our example above, this is stage payment 2 – the completion of opening up works. By this point, your builder will have already incurred costs in setting up site, ordering the first tranche of material and the labour to open up the roof. Therefore, as the homeowner, you are already ahead of the curve and the builder now working in arrears. Some of these costs will be out-of-pocket expenses, some using supplier credit facilities. Now that you’re a few days into the job, 10% is a fair first payment, as you can physically see where your money has gone.
Not surprisingly, this is paid out around the halfway point through the build schedule. In the example above, that means when the structure is now up and watertight. You will see we have three lots of larger 20% payments from in the early and middle stages of the build, which are in line with the bulky material purchasing. After that, payment sizes start tapering off.
The final payment
The final payment on the main sequence falls due upon successful completion of snagging. Again, builders would prefer a smaller percentage, but the sum should be sufficiently chunky to keep the team motivated to finish the job well. By virtue of working towards a finite snagging list, the homeowner gets the quality they expect, and the builder cannot be held to ransom with ever-growing add-ons.
The retention payment
This is a pre-agreed sum held back by the homeowner for a set period after the practical completion of works. Industry retention periods range from three to 12 months, but for a residential extension, I suggest a retention period of four weeks. This is fairer for the builder, who has by now handed back your home 2.0, fully snagged. Four weeks allows ample opportunity to start using the new space in the intended way and for any teething issues to surface. Some would argue that it can take months for latent defects (such as setting cracks) to appear, but these are not in the builder’s power to control, and therefore unfair that their earnings be held back. Moreover, a retention sum of 2% is sufficient. A homeowner would naturally want to retain more, but again, the extension is complete (and snagged), so the builder shouldn’t be chastised by having large sums of money stuck on a job they have already completed.
Additionally, look closely and you will notice the size of payments tapering off in the final third of the project stages. This is because a majority of bulk material purchasing (steels, aggregates, concrete, insulation, etc) happens in the earlier stages of the project, and towards the end of the build, the labour element constitutes the builder’s largest outlay.
A fair payment schedule needs to be fair for both homeowner and builder
Linking payments to productivity gives the builder surety to request payment when a milestone is reached, and the homeowner the confidence to release monies against progress they can physically see being made. Do not be tempted to arbitrarily link payments to time (i.e. equal payments spread out over the anticipated job duration) just because it makes the project easier to budget for. Doing so leaves the door open for an unscrupulous trader to request payment for the simple act of turning up to site, irrespective of how much progress has been made on the job.
In summary: agreeing a fair payment schedule with your builder is a fundamental component to anysuccessful project. Naturally, homeowners crave the comfort of schedule skewed in their favour, and the builder seeks protection from being out of pocket, so the agreed payment schedule will need to be a meeting of minds.
The previous house extension stages of finding and engaging with contractors will have gone a long way to establishing trust with your builder and this is important – without an element of trust that each party will uphold their end of the bargain, the payment schedule could become a stumbling block in the process. Intermediaries like a clerk of works or your architect could serve in an escrow role, but for a typical residential extension, that might be overkill.